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2d 945
This is an appeal from the district court's affirmance of an order of the United
States Bankruptcy Court for the Northern District of Georgia, dated July 31,
1980, confirming the amended plan of arrangement proposed by Perimeter Park
Investment Associates, Ltd., (hereinafter the "Debtor" or "Perimeter"), pursuant
to the provisions of Chapter XII of the Bankruptcy Act of 1892, as amended, 11
U.S.C.A. Secs. 801 et seq. (the "Bankruptcy Act"). Perimeter is a limited
partnership that owns and operates an office park located in DeKalb County,
We resolve both of these issues against the Secured Creditor and affirm the
district court.
I.
3
The following is an outline of the facts material to the issues presented in this
appeal. The facts are largely taken from the district court's order of April 14,
1981, which summarizes the extensive statement of facts and procedural history
found in the bankruptcy court's order of July 31, 1980.
This case began on September 15, 1977 when a Chapter XII petition was filed
by the Debtor. Pursuant to an order of the bankruptcy court, the Debtor, a
limited partnership consisting of twenty individuals, has been operating an
office park as a debtor-in-possession since the inception of this case. The office
park was purchased from Mr. Shouky A. Shaheen, a limited partner in
Perimeter. At the time of the purchase, the Debtor agreed to assume all of the
obligations of Mr. Shaheen under a deed to secure debt which conveyed the
office park to the Draper Owens Co. as security for a loan. The security deed
was eventually assigned to the Secured Creditor, the sole secured creditor
involved in this case holding well over 90% of the Debtor's outstanding debt
(the remaining creditors consist of small unsecured claims of utility companies
and trade creditors and a $20,000. claim of Mr. Shaheen individually on a note
executed by the Debtor).
When making its decision on confirmation, the bankruptcy court was faced
with two proposed plans of arrangement, one each submitted by the Secured
Creditor and by the Debtor. The similarity in the terms of the two proposed
plans is what forms the unusual nature of this bankruptcy proceeding.
In its final form, Acacia's proposed plan of arrangement gave the Debtor until
December 1, 1978 to select from several alternatives which supposedly would
allow the Debtor to retain an interest in the property. The plan stipulated that
upon failure of the Debtor to timely select from the proposed alternatives, the
property would be offered for sale to a third-party purchaser on at least the
same minimum terms offered the Debtor.
7
In fact, Acacia procured a contract for sale of the property to a third party,
executed before the December 1, 1978 deadline given the Debtor and subject to
the approval of the bankruptcy court. The contract provided for the sale of the
property to General Realty Services, Inc. for $2,525,000., $225,000.00 cash at
closing and a note in the amount of $2,300,000.00 yielding interest at 8 3/8%
and based upon an amortization period of 27 years.
The Debtor did not elect any of the alternatives in Acacia's amended plan of
arrangement, rather it filed objections to the bankruptcy court's consideration of
such plan; consequently, the Debtor was granted leave to amend its own plan of
arrangement.
The Debtor's amended plan provided that the Debtor would meet the terms of
the contract of sale between the Secured Creditor and General Realty Services.
The Debtor's plan also provided that the unsecured creditors would receive
100% of the amount of their allowed claims, as was also provided by Acacia's
proposed plan.
10
11
The Debtor sought leave of the bankruptcy court to amend its proposed plan of
At the close of the confirmation hearings, neither the Debtor nor the Secured
Creditor's plan was accepted by all the creditors. The bankruptcy court
announced, however, that it would confirm the amended plan proposed by the
Debtor. On July 31, 1980, the bankruptcy court entered its order of
confirmation. The Secured Creditor appealed.1
II.
13
The threshold question raised by the facts of this case has been considered by
various legal forums and has been the subject of judicial discord: whether a
debtor's Chapter XII plan of arrangement may be confirmed over the objection
of its sole secured creditor through the use of the "cram-down" provision of
section 461(11) of the Bankruptcy Act, 11 U.S.C. Sec. 861(11). This issue is
not explicitly covered by the provisions of Chapter XII. After careful
consideration of the previous decisions of Chapter XII courts and the purposes
and intent of said Chapter, this court agrees with both the bankruptcy judge and
the district court judge's determination that a Chapter XII plan of arrangement
may be confirmed over the objection of a sole secured creditor. 2
14
17 provide for any class of creditors which is affected by and does not accept the
shall
arrangement by the two-thirds majority in amount required under [Chapter XII],
adequate protection for the realization by them of the value of their debts against the
property dealt with by the arrangement and affected by such debts, either, as
provided in the arrangement or in the order confirming the arrangement, (a) by the
transfer or sale, or by the retention by the debtor, of such property subject to such
debts; or (b) by a sale of such property free of such debts, at not less than a fair upset
price, and the transfer of such debts to the proceeds of such sale; or (c) by appraisal
and payment in cash of the value of such debts; or (d) by such method as will, under
and consistent with the circumstances of the particular case, equitably and fairly
provide such protection.
18
19
Considerable debate has emerged over whether the "cram-down" provision may
be applied to allow confirmation in situations where no secured creditors accept
the plan of arrangement. "The controversy is greatest in sole secured creditor
situations such as presented herein. Chapter XII ... provides no answers. Courts
have been sharply divided on the issue...." In re Burnt Hills Associates, 3 B.R.
384, 386 (N.D.N.Y.1980).
20
At one extreme, courts have taken the position that if there are no secured
creditors who have accepted the plan, "cram-down" may not be used to confirm
the plan. See Gardens of Cortez v. John Hancock Mut. Life, 585 F.2d 975 (10th
Cir.1978); Taylor v. Wood, 458 F.2d 15 (9th Cir.1972); In re Herweg, 119 F.2d
941 (7th Cir.1941); Kyser v. MacAdam, 117 F.2d 232 (2d Cir.1941); In re
Schwab Adams Co., 463 F.Supp. 8 (S.D.N.Y.1978); In re Stillbar Construction
Co., 4 Bankr.Ct.Dec. 452, aff'd 4 Bankr.Ct.Dec. 1110 (N.D.Ga.1978); In re
Spicewood Associates, 445 F.Supp. 564 (N.D.Ill.1977). This position has been
taken in sole secured creditor situations as well as those involving more than
one secured creditor. See Meyer v. Rowen, 195 F.2d 263 (10th Cir.1952); In re
Perimeter Park Investment Associates, Ltd., 1 B.R. 473 (Bkrtcy.N.D.Ga.1979).
21
On the other side are cases involving sole-secured creditor situations in which
the courts have found that "cram-down" can be applied in order to allow
confirmation of a plan where there is a finding of adequate protection of the
creditor's interests. See In re Rainbow Tower Associates, 5 Bankr.Ct.Dec. 493
(D.Kan.1979); In re Marietta Cobb Apartments, 3 Bankr.Ct.Dec. 720
(S.D.N.Y.1977); In re Hobson Pike Associates, 3 Bankr.Ct.Dec. 1205
(N.D.Ga.1977).
22
Id. at 386-387.
23
In the instant case, we agree with both the bankruptcy judge and the district
court judge, that although ample support can be found for either position, under
the facts of this case ---- where the bankruptcy court at the confirmation
hearing was faced with substantially identical plans of arrangement proposed
by the Debtor and the Secured Creditor, both providing Acacia with nearly
identical economic benefits, and the Debtor is attempting through its plan to
pay the Secured Creditor the full value of its claim as determined by Acacia's
own actions in negotiating a binding contract of sale to an unrelated third party -- the "cram-down" provision should be applied to allow confirmation of the
Debtor's plan.
24
25
It is also illogical ... that Section 461(11) may be utilized where a secured
creditor rejects a plan and there are unsecured creditors who do not accept the
plan, but not where the sole secured creditor rejects a plan, and no unsecured
creditors affected by the plan exist. This result is particularly absurd because:
26
'... it is not terribly difficult for the enterprising real estate debtor to incur other
creditor obligations, perhaps even resulting in secondary and mechanics or
materialmen's liens on the property. The reorganization plan can propose
payment of all or part of these claims in cash, assuring the favorable votes of
those classes.' Lifton, Real Estate in Trouble, 31 Bus.Law, 1927, 1968 (1976).
27
28
31
32
Further support for the position that the debtor-relief provisions of Chapter XII
do not provide an individual creditor veto power over a debtor's plan can be
found in the legislative history of said Chapter. Chapter XII was enacted as one
of the Chandler Act Amendments to the Bankruptcy Act of 1898.5 The
legislative hearings on Chapter XII6 show that the reorganization-like relief
provided by said Chapter was targeted at one or a class of secured creditors
who under previous legislation could thwart a non-corporate debtor's hope of
rehabilitation.
33
I34would like to add this to what Mr. Celler said: You probably recall one difficulty
with 74 ... it attempt [sic] to deal with both secured and unsecured creditors, without
a classification, and requires the consent of the majority in numbers and amount of
these debtors' and in the ordinary individual debtor's case, his secured debt consists
of a mortgage on his home. That is the debt which is the majority in amount of all
his debts, but you cannot make the mortgagee come in, if he does not want to.
Therefore, the unsecured creditors cannot do anything much after a veto of the
secured creditor, if the debtor attempts to deal with both classes, which is sufficient
to defeat any arrangement that he proposed under 74 at the present time. It has been
absolutely ineffectual, as far as stopping foreclosure is concerned, and that is what it
was adopted for.
35
Hearings on H.R. 6439 before the House Committee on the Judiciary, 8th
Cong., 1st Sess. at 52 (1937).
36
As noted by the very able bankruptcy judge in the instant case, Congress in
drafting Chapter XII, solved the problem of the non-consenting secured
creditor by enacting Sec. 461(11), which requires all Chapter XII plans to
provide adequate protection to dissenting creditors so they will not have any
right to thwart the debtor's plan. "But Congress did not stop by enacting Sec.
461(11). To guarantee the desired cram-down effect of Section 461(11), the
Chapter XII draftsmen added a final clause to Section 468(1), which ...
expressly provides that a dissenting creditor who is adequately protected under
Section 461(11) is not to be included in the vote determining acceptance of the
plan. The legislative intent, reflected in conference committee minutes, is clear.
Once a creditor is adequately protected, it no longer can vote on or interfere
with confirmation of the arrangement under Section 468(1). Its right to vote and
to participate in the arrangement is traded for the more conservative and often
safer guarantees of Section 461(11)(a)-(d)." Bankruptcy Court's Order of July
31, 1980, at 85, (emphasis in original) (footnotes omitted).7
37
"Without the constraints of the 'fair and equitable test,' Congress intended that a
debtor could retain an interest even if the objecting creditors are not paid in
full, provided that they are given adequate protection. Thus, we find that
Congress intended that the key to confirmation is whether the objecting
creditors receive adequate protection." In re Mallard Associates, at 1045.
"Congress was more concerned with the judicial determination of 'adequate
protection' to be provided to the objecting secured creditor and for the debtor to
be permitted to retain the real property after payment or provision for such
'adequate protection,' than with the acceptance process by non-affected
creditors, or the existence of other creditors." In re Hobson Pike Associates, at
363. As recognized by the court in In re Lamarche, 4 Bankr.Ct.Dec. 443, 443
(M.D.Fla.1978):
39
This Court rejects the contention that a sole secured creditor can defeat the plan
of arrangement. 'The true design of the Chapter XII statutory authority is not
whether there are creditors to accept the plan in writing, but whether the plan
provides the necessary "adequate protection" to the objecting creditor, as
required by Sec. 468(1) and 461(11) ...' In re Hobson Pike Associates, Ltd., 3
Bankr.Ct.Dec. at 1212; see also, In re Marietta Cobb Apartments Co., Vol. 3
Bankr.Cf.Dec. at 720.
40
The examination of Chapter XII's legislative history, the 1952 amendment, and
cases construing Sec. 461(11) and said section's statutory predecessors
demonstrate beyond peradventure that the debtor's "[r]etention of [his] property
is the statutory scheme of Section 461(11)(c) and adequate protection, rather
than consent, of the secured creditor is its keystone." In re Pine Gate
Associates, 10 C.B.C. 581, 602-603 (N.D.Ga.1976) (emphasis in original).
Thus, a debtor can move for confirmation over the objection of the sole secured
creditor so long as "adequate protection" is provided the secured creditor by
one of the means listed in Sec. 461(11).9
41
42
43 (Acacia's) agreement to the purchase price and the terms of financing establishes
Its
its own view of its value, and hence, 'adequate protection'. The Debtor's plan which
offers the same economic terms and payment conditions to the Secured Creditor,
and, by evidence, greater proven financial and management resources for
consummation of the plan, provides to Acacia the 'adequate protection' prescribed in
Sec. 461(11).
Order of Confirmation at page 43
44
45
46
47
We opine that the issues raised on this appeal present exceedingly close
questions. We also recognize the strong lines of authority supporting both
parties' position. We agree, however, with the bankruptcy court and the district
court that disposition of the issues involved turns on the unusual facts of this
case. We again emphasize that in this case the bankruptcy judge at the
confirmation hearing was faced with two plans of arrangement, one each
proposed by the Debtor and the Secured Creditor. Both plans provide the
Secured Creditor with substantially identical economic benefits; the only
material difference being that under the Debtor's amended plan the Debtor will
retain an interest in its property, while under the Secured Creditor's plan, the
Debtor will be liquidated and the property sold to an unrelated third party. Most
important, the Debtor's plan provides adequate protection to the Secured
Creditor for the realization of the value of its debt as established by the Secured
Creditor's own actions in negotiating a binding contract of sale to an unrelated
third party. In view of these facts and the federal policy favoring rehabilitation
and reorganization of a debtor's business under the Bankruptcy Act over
liquidation, we conclude that the district court did not err in affirming the
bankruptcy court's confirmation of the Debtor's amended plan of arrangement.
48
AFFIRMED.
MORGAN, Senior Circuit Judge, dissenting:
49
I respectfully dissent. Sections 461(11) and 468 of the Bankruptcy Act do not
allow confirmation of a plan over the unanimous objection of the secured
creditors. The number of secured creditors is not mentioned in either section
and is irrelevant. As Judge Henderson stated in In Re Perimeter Park
Investment Associates, Ltd., 20 C.B.C. 912 (N.D.Ga.1979) (vacating the
bankruptcy court's opinion in an earlier proceeding of this same case): "[I]t is
not that a single secured creditor may have an absolute veto which should be of
concern. Instead, it is that the unsecured creditors, who may hold a small
percentage of the claims, may gain total control over the arrangement." Id. at
914.
50
The majority opinion ignores the plain and unambiguous language of sections
461(11) and 468 of the Bankruptcy Act in order to avoid what they believe is
an "absurd result." I note, however, that this "absurd result" has been reached
by the overwhelming majority of courts to address the issue, including every
relevant circuit court opinion. Gardens of Cortez v. John Hancock Mutual Life
Insurance Co., 585 F.2d 975 (10th Cir.1978); Taylor v. Wood, 458 F.2d 15 (9th
Cir.1972); In re Herweg, 119 F.2d 941 (7th Cir.1941); In Re Spicewood
Associates, 445 F.Supp. 564 (N.D.Ill.1977); Matter of Schwab Adams Co., 463
F.Supp. 8 (S.D.N.Y.1978); Matter of Georgetown Apartments, 468 F.Supp.
844 (M.D.Fla.1979); In Re Stillbar Construction Co., 4 Bankr.Ct.Dec. 1110
(N.D.Ga.1978) (District Judge Edenfield affirming the bankruptcy court's
opinion); In Re Perimeter Park Investment Associates, Ltd., supra. See
generally Kyser v. MacAdam, 117 F.2d 232 (2nd Cir.1941); In Re Hamburger,
117 F.2d 932 (6th Cir.1941). Moreover, I believe the majority opinion is
inconsistent with controlling precedent in this circuit, Kunze v. Prudential
Insurance Co., 106 F.2d 917 (5th Cir.1939), although I concede the rationale of
that case is less than articulate. Unlike the majority, I cannot reject these cases
as poorly reasoned and adopt the rationale of a handful of bankruptcy court
decisions.
51
Originally, Acacia took two appeals from two orders and judgments by the
United States District Court for the Northern District of Georgia involving a
proceeding under Chapter XII of the Bankruptcy Act. One appeal (under
Docket No. 81-7352) is from an order dated April 14, 1981 (Record "R.") Vol.
19, pp. 1464-1472; Record Excerpts ("R. Ex."), p. 11), affirming an order of the
bankruptcy court dated July 31, 1980 (R.Vol. 14, pp. 26-118; Appendix
("App.") p. 11), which had confirmed an amended plan of arrangement
proposed by the Debtor. One of the judgments appealed from (under Docket
No. 81-7491) was entered on May 12, 1981 with respect to the April 14, 1981
order. (R.Vol. 19, p. 1490; R.Ex. p. 20). The other appeal (under Docket No.
81-7494) is from an order dated May 7, 1981 (R.Vol. 13, pp. 261-63; R.Ex. p.
21) and judgment entered May 8, 1981 (R.Vol. 13, p. 264; R.Ex. p. 24)
affirming the order of the bankruptcy court dated July 30, 1980 (R.Vol. 12, pp.
13-15; App. p. 8) determining that the Appellee has no personal liability to
Appellant on a note in the original principal amount of $2,500,000 that had
been assumed by the Debtor when it acquired real property securing the note
On the unopposed motion of Acacia, these appeals were consolidated in
November, 1981.
Acacia also asserts on appeal (1) that the bankruptcy court and the district court
erred in holding that the language contained in the Warranty Deed and the
Promissory Note involved with the syndication of the Debtor's office park is
insufficient to constitute a creation of personal liability by the Debtor
partnership or its general partners; and, (2) that the conclusion of the
bankruptcy court, not addressed by the district court, that Acacia was not an
"affected" creditor and consequently that the Debtor's plan could be confirmed
under Sec. 467 of the Bankruptcy Act is clearly erroneous. The district court
expressly considered and rejected the first of these claims. We find the reasons
given in the court's opinion to be adequate and correct. As to the second point,
we have heard nothing that would even hint at reversible error, and wholly
reject the argument
1938 ... where the debtor is confronted with numerous creditors of the same
class possessing varying viewpoints and positions incapable of attaining a
consensus; and that Sec. 461(11) was included to prevent an injustice against
the debtor and the other minority creditors of that class which might result from
the actions of the objecting majority of the creditors of that class. This
argument is that a debtor may use Sec. 461(11) to deal with a recalcitrant
secured creditor holding a majority of the debt where the debtor has other
minority creditors who would benefit by the plan; but that the debtor may not
use Sec. 461(11) to deal with that objecting secured creditor where the debtor
has no other creditors.
This argument necessitates the position that Congress did not anticipate and had
no intention to permit Chapter XII to become a vehicle for rehabilitation of the
debtor's business where the debtor was confronted with only one creditor or
only secured creditors. This argument would be founded on the assumption that
multiple secured creditors, not a single controlling secured creditor, was the
prevailing or only known condition confronting debtors and bondholders, etc.,
when Congress enacted Chapter XII. This argument would require a holding
that Congress intended Chapter XII to apply only to the business organization
and lending conditions confronting it in 1937-38 upon consideration and
enactment of Chapter XII, to wit: the business entity and lending practices
existing at the time of enactment of the act limits the application of Sec. 468
and Sec. 461(11) some forty years later despite expansion of different business
entities and practices engaging in real property ownership since 1938.
This argument is difficult to sustain in the face of the decision of the Supreme
Court in Continental Illinois National Bank and Trust v. Chicago, Rock Island
and Pacific Railway Co., 394 U.S. 648 [55 S.Ct. 595, 79 L.Ed. 1110] (1934)
[1935], which approved the constitutionality of Sec. 77 of the Act. In that case,
the creditors had argued that Congress was without the power to enact debtor
relief provisions other than to provide for straight bankruptcy because straight
bankruptcy was the only insolvency remedy known, available and anticipated
at the time of the adoption of the Constitution in 1789. The Supreme Court
rejected such argument and held that the bankruptcy power of Article I of the
Constitution was not static, but a flexible power on which Congress could
expand with statutes appropriate to the change of conditions of the times.
Similarly, Chapter XII cannot be construed to apply only to the types of real
entities and conditions existing in 1938. If the Chapter XII shoe fits under the
conditions of today, it must be permitted to be worn.
Chapter XII and Sec. 468 and Sec. 461(11) must be read in this light to apply to
the entities such as limited partnerships which now frequently hold one real
estate project and have one secured creditor. It was the economic distress of the
many Straus bond type debtors in the Great Depression of the mid-30's which
brought about the relief provided in Chapter XII. It is the economic distress of
current limited partnerships and similar individual-type debtors, confronted
with a similar economic depression, which brings the debtor today to the
Bankruptcy Court for Chapter XII relief. The statute fits the partnership entity
and this purchase money mortgage holder, now before the court.
5
The conference committee minutes referred to in the above text were reported
in 83 Cong. Record 9108 (June 13, 1938). The bill was enacted as amended by
the conference committee. 11 U.S.C. Sec. 861(11), 52 Stat. 923 (1938). The
conference committee notes state:
The Senate, has, therefore, rewritten the provision, so that it will be clearly
indicated that creditors for whom adequate protection has been provided, in the
manner above set forth, are not to be counted in computing the required
majorities for acceptance. In formulating this additional provision, further
language has been added to make certain that creditors not affected for any
other reason shall not be included in the computation. (Emphasis supplied).
See also, to same effect: Hearings on H.R. 8046 before the Senate Committee
on the Judiciary, 75th Cong., 1st Sess., pp. 9, 131. Reproduced in Bankruptcy
Act Revision: Hearings Before the Subcommittee on Civil and Constitutional
Rights of the Committee on the Judiciary, House of Representatives, 94th
Cong., 1st and 2nd Sess., on H.R. 31 and H.R. 32, Supplemental Appendix,
Part 1, Serial No. 27, p. 826.
31
The courts had installed the "absolute priority rule" as being inherent in the
"fair and equitable" test. The "absolute priority rule" requires the stockholders'
interest in the property to be subordinated to the rights of creditors. Secured
creditors get first priority according to their rank and the unsecured creditors
follow. All members of a higher priority class must be paid in full before lower
priority classes can be paid
Prior to the 1952 amendments, even though the creditor had received the full
value of the debt under Sec. 461(11), at the confirmation hearing, and upon
application of the "absolute priority rule," the plan would not be confirmed by
the court because the debtor retained an interest in the property without paying
the full amount of the debt. This rendered Sec. 461(11) virtually meaningless
and unavailable to a debtor as Congress recognized in 1952. In 1952, Congress
expressed its dissatisfaction with the judicial application of the "absolute
priority rule" to Chapter X, XII, and XIII cases, and repealed the "fair and
equitable" test and the inclusive "absolute priority rule" as being applicable to
such "individual" types of rehabilitation chapters of the Bankruptcy Act. See
Sec. 366 Act Comment on 1952 Amendment, 1976 Collier Pamphlet Edition,
Bankruptcy Act and Rules, at 467.
Moreover, the cases cited by Acacia do not mandate a contrary result. Acacia
offers the cases In re Burnt Hills Associates, 3 B.R. 384 (N.D.N.Y.1980), and
In re Village I Apartments Associates, 3 B.R. 388 (N.D.N.Y.1980), as support
for the position that a debtor's plan of arrangement cannot be confirmed over
the objection of the sole secured creditor. In both these cases, the courts were
faced with the question whether a plan could be confirmed under Sec. 461(11)
of the Bankruptcy Act where the sole secured creditor opposed confirmation
After reading both cases, however, this court recognizes a principal distinction
in those cases from the case at bar. In Burnt Hills Associates and Village I
Apartments Associates the respective debtors were proposing to pay the
secured creditors less than the amount of the value of their claims, which would
have left the debtors in possession of the property free of the security interests
held by the secured creditors. In the present case, however, the debtor is not
attempting to remove the lien of the Secured Creditor. Nor is it proposing to
pay the Secured Creditor less than the amount of its claim by appraising the
property. From a reading of the Debtor's amended plan, it appears that the
Debtor is attempting to pay Acacia the full value of its claim as determined by